WASHINGTON-With the continually escalating number of bankruptcy filings, credit union trades and other leaders still feel the legislation to reform the bankruptcy system (H.R. 975) is worth the financial and political expenses of the last few years. “Bankruptcy [reform] is just as important as it was six years ago, possibly more important if you look at the numbers over the past six years,” NAFCU Senior Legislative Representative Murray Chanow said. He indicated the record bankruptcies reported by the Administrative Office of the U.S. Courts for the first quarter of 2003 (see sidebar on page 32). “Our members are the ones who have told us this issue is important to them. Over the last six years, our members have been very adamant that this issue is important to them.so, yes, it’s worth the political capital,” Chanow said, pointing out that it is important to work on issue from beginning to build a good relationship with key people. NAFCU’s own survey data, specific to its members, provides similar indicia. NAFCU Chief Economist Tun Wai commented, “We are seeing an uptick in terms of the charge-offs. Back in September it was 50% [charge-offs due to bankruptcy/total charge-offs; in March it was 53%." But, he clarified, March data is not as accurate as year-end (49.17%) when credit unions are more likely to write off the bad debts. CUNA Senior Vice President of Government Affairs John McKechnie related the issue as he has seen it in the field. "The problems continue," he said. `I've spoken to two league annual meetings in three weeks and the leadoff question has been why can't we get bankruptcy reform passed.?" The Kentucky Credit Union League recently visited with Senate Majority Whip Mitch McConnell (R-Ky.) and made sure the issue is still on his radar screen. However, strong opponents to the bill, State Employees Credit Union (N.C.) CEO Jim Blaine criticized that the bill does not place more accountability with lenders. "It's an anti-consumer piece of legislation that credit unions should not be supporting," he said. Credit card companies are lending to consumers at rates in excess of 20% when their own rates are next to nothing, which he called abusive. "If they get tied up with this type of lender, a good guy like us can't get them out," because borrowers are too upside-down in their loans, Blaine explained. "We're not the lender putting folks into bankruptcy, but we're paying the price." He added that SECU stands to gain little from the current bankruptcy reform legislation. Blaine acknowledged that the vast majority of his credit union's lending losses is due to bankruptcies, but SECU has not tightened lending standards yet. McKechnie supported this stance. "Credit unions don't look at the profit mode when looking at a loan," he explained. Credit unions are reluctant to change their lending standards because they tend to want to help their members rather than restrict them, he said. "The legislation will benefit some credit unions more than others," credit union bankruptcy consultant Bill Mapother admitted. Overall though, he said there are more positives in the bill than negatives. One of the things Mapother preaches to his clients is steering a member away from filing for bankruptcy with financial education. "I am very strongly in favor of financial counseling and financial education.I have been critical of credit unions in their failure to do more in this area. I criticize credit unions because they say they're out there for service and I don't think they're serving their members as well as they should," Mapother said. He added that he does not criticize banks as much because they do not claim they are out to serve. The reaffirmation provision is another story in Mapother's book. He said that the form, intended to make all states uniform, is overly complicated and unduly burdensome for creditors. He emphasized that credit unions are only exempt from one small portion of the form. Mapother also wants to dispel a myth that credit card companies are going to be the major beneficiaries of this bill. In fact, he said it is auto lenders and not just the captives, but also banks and credit unions. Large car loan portfolios are not uncommon among credit unions. He explained that under Chapter 13, cars have to be valued at retail so borrowers end up paying even more than they originally owed. Those extra funds are likely to be taken away from paying unsecured debts, he observed. Otherwise the vehicle would be repossessed. Measures that credit unions can take to avoid bankruptcy losses without passage of the bankruptcy reform legislation, Mapother advised, include 1) steering the member from bankruptcy through financial counseling; and 2) working with the member to rewrite the loan and collateralize it. "It will not only help the people but they'll get the most loyal member they ever had," he said. Additionally, credit unions should hire a specialist to perform these tasks and pay them well. "[Credit unions] treat bankruptcy specialists like collectors and that’s a mistake,” he said. Collectors are trained just to get the loan off the delinquency sheet as opposed to really working with the borrower, according to Mapother. However, the bill can still serve to put even more money back into credit union coffers. According to McKechnie, the bill would provide judges with more discretion over the way they approve Chapter 7 filings, which gives borrowers a clean slate. He said that for several years in a row, more than 90% of Chapter 7 filings have been approved. “Credit union people feel judges don’t look at it seriously,” McKechnie said. Chanow added that the means test is the most important aspect of the bill because it could push 10% to 15% of filers from Chapter 7 to Chapter 13 noting an Ernst & Young study. Even this percentage would help credit unions because they cannot write off bad debts like a bank does, so it gets passed back to the members. Additionally, Chanow said the aim of the bill is to place filers in the appropriate chapter. While it will be harder for filers under a Chapter 13 repayment plan to switch to Chapter 7, there are safeguards in place to ensure low-income persons are automatically placed in Chapter 7. In contrast, Blaine said the Chapter 7 means test is too “one size fits all” and does not take into account if a person has two young children, no children, or is a retiree. While Blaine said the bankruptcy system does need reforming, his `dream’ legislation would place more accountability with the lender and take into consideration the dates the loans were made. For example, he said, if SECU makes a perfectly sound loan to a member and two years later, another lender provides the member a loan that they obviously cannot afford to repay, the first loan should get priority. Support of the current legislation is a “black mark on our white hat,” he said. [email protected]

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